The Iceland summit collapsed Sunday, crushing hopes for a...

REYKJAVIK, Iceland -- The Iceland summit collapsed Sunday, crushing hopes for a sweeping agreement on nuclear arms control, when President Reagan refused to yield to Soviet demands for curbs on his 'Star Wars' space defense program.

The Soviets, Reagan said, wanted to deny the United States the opportunity to do serious work on his Strategic Defense Initiative for 10 years and he declared, 'This we could not -- and will not -- do.'

In a post mortem, Secretary of State George Shultz said the United States was 'deeply disappointed' by the failure after nightlong talks put together a package that included dramatic cuts in strategic and intermediate range weapons that foundered on the 'Star Wars' dispute.

'The Soviet Union's objective was to kill off the SDI program. The president simply had to refuse to compromise,' Shultz said.

Soviet leader Mikhail Gorbachev was more bitter.

'This has been a failure. A failure when we were very close to positive results,' Gorbachev said.

'The American side came to this meeting empty handed with a set of mothballed proposals from the Geneva negotiations,' Gorbachev said.

But he also tried to find a bright spot and added: 'We made more progress than we anticipated when we came to Iceland.'

Shultz said the leaders, who met for 7 hours Sunday -- including a surprise fourth meeting -- failed to set a date for a third summit in the United States, one of the key purposes of the meeting in Iceland. 'I don't see any prospect of it,' he said.

Despite extended talks that doubled the length of the second Reagan-Gorbachev summit, and progress in nightlong negotiations that brought a sweeping arms control package tantalizingly close to approval, the two sides could not reconcile Reagan's determination to pursue 'Star Wars' and Soviet inisistence it be cut back to a laboratory-only research project.

'That was just a deal-buster from the start,' one U.S. official said.

'We came to advance the cause of peace,' Reagan said in a farewell statement to Air Force families at a U.S.-run NATO base near the Icelandic capital. 'And, though we put on the table the most far-reaching arms control proposal in history, the general-secretary rejected it.'

Nonetheless, Reagan said the talks had 'made great strides in resolving most of our differences and we're going to continue our efforts.'

Echoing that assessment, Gorbachev told a news conference that his rendezvous in Reykjavik with Reagan has 'given us substantial gains,' and said, 'We have reached agreement on a great deal of things.'

Saying Reagan needs time to hear the views of Congress and the American people, the Soviet leader said, 'We are waiting. We have not withdrawn the proposals we have put forward.'

While those comments held out hope for progress in the continuing arms talks at Geneva, White House chief of staff Donald Regan was quick to fix blame for the derailing of what one U.S. official called 'the most appealing arms package' ever seriously considered by the superpowers.

'The Soviets are the ones refusing to make this deal. It shows them up for what they are,' Regan said. 'The Soviets finally showed thier hand.'

Other senior U.S. officials emphasized the positive aspects of the talks, saying that before the 'Star Wars' dispute jerked the rug out from under a final statement the negotiators had reached agreements in principal covering strategic weapons, intermediate range nuclear forces and nuclear test limits.

But in the end, it was Reagan and Gorbachev who were called on to fit the final pieces together and the Soviet insistence on limiting work on Reagan's space-based anti-missile system to laboratory work for a decade would not fit for the president.

Gorbachev countered that there be no package at all if SDI was not included, and hopes for a final statement embracing arms control proposals as well as human rights, bilateral and regional accords blew away in the biting North Atlantic wind.

It was clear from comments by both sides that the final four-hour session of talks was devoted exclusively to sparring over 'Star Wars.'

Regan said U.S. negotiators told the Soviets, 'We'll do away with all nuclear weapons' and provide the Soviets with the fruits of the multibillion-dollar SDI effort 'if you agree to let us continue our research for this defense ... for 10 years we will not delpoy that system.'

But the Soviets were adamant that testing of 'Star Wars' must not take place and the U.S. determination to pursue testing the complex system of space and land-based weapons was unacceptable.

'It would have taken a madman to accept that and mad men are mainly in hospitals,' Gorbachev said. 'I don't see them in leading positions in countries.'

Shultz, however, said SDI, an effort to develop weapons that would knock down attacking nuclear missiles, is 'the shield that is held in front of freedom.'

All the action in the last day of the summit, including the surprise fourth session, involved not only the leaders but also top arms control advisers and key aides from both sides, including many of the negotatrors who have been working on the issues since the first Reagan-Gorbachev summit in Geneva in November 1985.

Before the final session at Hofdi House -- scene of all the Reagan-Gorbachev talks and a nightlong negotiating meeting by arms experts -- both sides said progress had been made toward some accords. Only after the final handshake was the failure acknowledged.

Shultz, briefing reporters who had flocked to the Icelandic capital for what had been billed as an informal meeting, repeatedly said that its results could have been 'sweeping and substantial and important.'

But in the end, talk of a deal to cut strategic arsenals by 50 percent and a deal to eliminate all intermediate range missiles from Europe evaporated in the face of the heated argument over 'Stars Wars.'.

White House spokesman Larry Speakes had told reporters earlier that the Reagan-Gorbachev meetings had been marked by 'a solid give and take,' and Shultz said Reagan had displayed great 'creativity' in his efforts to 'reach out' to the Soviets in quest of an accord.

All told, the summit talks lasted 11 hours -- roughly double the six hours of talks initially planned. Sunday's two sessions totalled 7 hours, including the unexpected afternoon meeting that lasted until after dark.

Reagan appeared somewhat weary as he and Gorbachev left Hofdi House for the last time, and they stood together chatting at the door of the president's limousine briefly before shaking hands conclusively.

Gorbachev nodded and smiled a bit as he grasped Reagan's right hand, and the president also bobbed his head, then looked at the ground with a shrug before climbing into his car.

The overnight arms developments quickly eroded a news 'blackout' that had been imposed over the meeting, suggest by Gorbachev last month as a way to narrow differences in preparation for a full scale summit in the United States.

At the conclusion of Saturday's second two-hour session, Reagan and Gorbachev directed 'working groups' to meet at Hofdi House, a reputedly haunted white clapboard ceremonial residence overlooking Reykjavik harbor where the leaders opened the summit with a 'friendly and businesslike' 51-minute session alone except for interpreters and note-taking aides.

The first and only significant security scare of the summit, staged on the remote North Atlantic island in part for its small population and inaccessibility to terrorists, occured during Sunday's lengthy first session. But it proved inconsequential.

Three Icelanders, sailing Faxa Bay to go fishing, strayed into the security area off the parklike grounds surrounding Hofdi House and were detained.

The arms control group met until 6:30 a.m. and its members were present -- although bleary-eyed -- during Sunday's talks. The other group, dealing with human rights, regional and bilateral issues met until 4:40 a.m. U.S. officials said the later group also made progress, but with the collapse of the overall deal there was no indication what had developed on those fronts.

The dramatic confirmation of movement in the arms control area came as the 'mini-summit' was nearing what had been scheduled as its end. Reagan and Gorbachev began what was scheduled as their final meeting Sunday morning -- but rather than ending about noon after two hours, it lasted until 1:35. p.m.

At that time, they stepped on to the uncovered porch and shook hands. In response to a shouted question about whether any agreement had been reached, Reagan replied, 'We're not finished yet,' and disclosed they would meet again.